Weekend Portfolio Analysis (August 1, 2015)

Market Conditions

This market is starting to feel a bit like “Groundhog Day.” Last week the market was down, this week it gained back a bit more than 50% of what it lost last week. The S&P 500 Index (SPX) opened Monday on a cautious note at 2078.19 and closed Friday at 2103.84, up 25.65 or 1.23%. Earnings reports continued to be the major focus this week. A disappointing Employment Cost Index report on Friday along with lackluster earnings from oil giants ExxonMobil (XOM) and Chevron (CVX) muted the week’s earlier enthusiasm.

Chart_073115_SPX

The SPX continues trading in the 2040-2135 range that has bound it for most of the year with no end in sight. This is great news for credit spread sellers and bad news for the buy-and-hold crowd.

Crude oil rallied mid week due to a surprisingly large drawdown in crude inventories. On Friday /CL gave up all of the week’s prior gains due to a higher U.S. oil rig count for a second week in a row. /CL crude oil futures opened Monday at $48.00 and closed Friday at $46.77, down $1.23 (or 2.56%).

Chart_073115_CL

Trade Activity This Week

It was another busy week with many earnings trades. This quarter has been a difficult one for earnings trades as there have been more outlier moves than I have experienced in the past. Although I am still in positive territory for earnings trades this season, it has not been as lucrative as past quarters.

Monday I closed two crude oil positions. The /CL Sep 55 call was closed for a $72.88 profit and the Sep 52.5/53.5/47.5/46.5 iron condor was closed for a loss of $68.48. With the continued decline in oil on Monday, I thought it would be best to start reducing my risk as opportunity presents itself, particularly since my position in crude oil has grown a bit larger than originally planned. Tuesday I closed the /CL Oct 68 call for a $122.88 profit. I will not go into detail on the oil trades here, but plan on posting a separate article that will chronicle the entire trade, series of adjustments, and hedges. Of course I am going to wait until the /CL positions are completely closed before doing this.

Also on Tuesday, I closed both the /ES Aug 1850/1800 put vertical and the /ES Sep 1830/1780 put vertical. These were closed for profits of $49.36 and $34.36, respectively. With US Steel (X) reporting earnings on Tuesday evening, I sold the Jul5 18 straddle for $1.45 and closed it Wednesday morning for a scratch ($11.00 profit after commissions). On Wednesday I also closed the /CL Oct 37 put for a $152.88 profit after commissions. Wednesday before the close I placed two earnings trades – Solar City (SCTY) and Whole Foods (WFM). I sold the SCTY Jul5 63/51 strangle for $0.99 and was able to close it the next morning for a nice profit of $70. In WFM I sold the Jul5 41 straddle for $3.60. WFM moved well beyond the expected move on a negative earnings report resulting in a loss of $152 on this trade. I am starting to see a pattern here – the strangle for earnings trades is just not working well for me this season. I may need to rethink this strategy.

On Thursday I also closed part of the FXE position by rolling the 112 call to the 108 call. This resulted in a $165 profit on the 112 call. Thursday evening I sold the Jul5 78/63 strangle in Deckers Outdoor (DECK) for $1.13. Another decent return with a profit of $97.00 I also sold the Electronic Arts (EA) Jul5 77.5/67.5 strangle for $1.05 and closed it for a $67 profit.

On Friday, I bought back the Aug 15 put in SkyWest (SKYW) that I had sold two weeks earlier for a $62.00 profit. Although not sold with earnings in mind, SKYW did report earnings Thursday evening and beat estimates in a big way resulting in a 20% rally in the stock on Friday creating an opportunity to close this trade for a nice profit. Finally, I closed the /CL Sep 54 call for a $92.88 profit.

Overall, a good week!

Plan For Next Week

July is officially behind me and is one for the record books (my personal record book). In July I have experienced both the largest profit in a single month as well as the largest return on capital in a single month since I began trading. In July, the portfolio returned a 10.86% return on capital for the month. The portfolio is up 39.24% for the year versus 2.18% for the S&P 500 (see Trading Results).  The portfolio is currently over 60% in cash.

I will be looking for opportunities to continue closing out the remaining /CL positions. Trading activity will likely slow down a bit. I had more trades in July than any other month this year. However, I am planning a vacation during the fourth week of August, so I will be trying to unwind any short-term trades before that time and don’t plan on adding any more short-term trades until after I return. I will continue to put on longer term credit spreads in /ES, RUT, and SPX if volatility expands again.

Have a great weekend!

  • Jonathan

    Keep up the great work Aram. You and Henrik are one of the few legit and free trading sites on the web.

  • JM

    Great work Aram. I just discovered your web site through one of your comment on the lazy-trader. I like your work on market condition, this is really helpful. If I may, can you tell me what’s your typical strategy in terms of strike price in a strangle for earning plays? Are they fixed for every play (e.g. 1SD), or adjusted for the expected move? Thanks and keep it up!

    • Aram Basmadjian

      Thanks, JM. For earnings, I prefer to use a strangle with the strikes at around two times the expected move. However, if the premium is to little, I will consider placing the strikes just outside the expected move. The farther you can get the strikes away and still collect a reasonable premium, the better off you will be.